Wednesday, May 4, 2016

Comments on the Draft Rule for giving Foreign Tax Credit

1. Introduction:
Finance Act 2015, inserted, w.e.f. 01.06.2015, clause (ha) in sub-section 2 of Section 295. It enables the Board, subject to the control of Central Government, by a notification in the Gazette of India, to make rules specifying the procedure for grant of relief, deduction of any Income tax paid in any country or specified territory outside India u/s 90, or Section 90A or Section 91, against the income-tax payable under the Act. Accordingly, the Board has, in accordance with the recommendation made by the Committee constituted by it, vide LETTER [F.NO.142/24/2015-TPL], DATED 18-4-2016, announced Draft Rules for granting relief or deduction under section 90/90A/91 of the Income-tax Act, 1961.
2. Salient features of Draft Rule:
The salient features of the Rules are:
i.

For the purpose of giving credit, Foreign tax means-

(a)

Tax covered in the Double Taxation Avoidance Agreement entered into by India with a country in terms of Section 90/90A.
(b)

Tax, being in the nature of Income tax referred to in clause (iv) of the Explanation to section 91, payable under the laws in force in a country, with which India does not have Double Taxation Avoidance Agreement.


ii.

The Foreign Tax Credit shall be allowed to an Indian resident by way deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule.
iii.

The Foreign Tax Credit shall be allowed only against Income tax, Surcharge and cess payable under Income tax Act and not against any interest fee or penalty.
iv.

No credit of Foreign Tax shall be allowed if, it is disputed in any manner (in the Source Country).
v.

The foreign tax in respect of each source of income in a particular Foreign Country or specified territory shall be calculated separately and aggregated. The credit of such aggregate shall be allowed in the following manner:-

(a)

The credit shall be lower of the tax payable on such income under Income tax Act and in the Foreign Country/specified territory.
(b)

The amount of foreign tax for which credit shall be given will be worked out in Indian Currency on the basis of the telegraphic transfer buying rate on the date on which such tax has been paid or deducted.

vi.

The credit of foreign tax shall be allowed against tax payable u/s 115JB or 115JC in the same manner as it is allowed against tax payable under the normal provisions of the Act.
vii.

Where Foreign Tax Credit has been allowed against tax payable u/s 115JB and 115JC and such Foreign Tax Credit exceeds the credit available against tax payable under normal provisions of the Act then, while computing the amount of credit u/s 115JAA or 115JD in respect of the taxes paid u/s 115JB or 115JC, such excess shall be ignored.
viii.

For claiming Foreign Tax Credit following documents are required to be furnished by assessee:

(a)

Certificate from the Tax Authority of Foreign Country specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee.
(b)

In case of tax deducted at source a certificate from the person responsible for deduction of such tax.
(c)

In case of online payment of foreign tax, acknowledgment or bank counter foil or a slip or challan.
(d)

A declaration to the effect that amount of Foreign Tax in respect of which credit is being claimed is not under dispute.

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